Searchlight Crusade

Selling to Avoid Foreclosure in a Buyer's Market

Sat, 21 Nov 2009 07:00:00 -0800

Found this on a public forum

I need help to stop foreclosure on my home. I need to sell quickly? I am a couple months behind on my payments and want to sell now. I am not looking to make a profit just need to get what i owe.

Boy, did the sharks swarm over that one! There were at least a dozen offers to purchase before I saw it. Anybody will buy your house for half the market value. There mere prospect of a seller who is desperate and doesn't know any better sends these folks into paroxysms of lust - lust for the profit they're going to make on the property. Contact an agent about selling at quick sale prices. Offer 2% or 2.5% to the listing agent, 3% or whatever is average or slightly above in your area to the buyers agent. Even a quick sale price should get you at least 80% of value. Yes, that will cost you 5%. But you'll come out with 75% of value net, instead of the fifty you'll get doing business with the sharks. If your loan balance is anywhere under 75% of the value, this puts more money in your pocket. If your loan balance is more than that, it means you'll owe less in taxes when the lender hits you with a 1099. Not to mention that trying to sell a short payoff without a good agent is an exercise in futility. Now this is not to say that you should list it for 80% of your most fevered imagination of what it is worth. You need to sell, as in have someone offer a price that they can actually pay you, and quickly. You need offers. Ideally, you want multiple offers fast. You do this by not over-pricing the market value of your property, so that you will attract people who want to look, and they think it's a good price so they make an offer. The offer will not be full asking price, and don't waste your time hoping that you will get such an offer. Once that Notice of Default hits, everybody knows that you need to sell. To use one example I'm going through with a buyer client right now, if your property is a two bedroom place that basically looks like wild animals have been living there, and your list price is 99% of the three bedroom down the street, you are not going to get it, and you have a deadline, while your prospective buyers do not. You need to figure out what it is really worth by sales of comparable property happening right now, and then you need to discount that price by enough to make a difference. How much? Depends upon what your local market is like. That's part of what good agents get paid for. Toss any concept of "negotiating room" or "getting what the property is worth" out of your head. Get your attitude completely out of the seller's market we had a few years ago. Especially in a buyer's market, all of the power is in the hands of the prospective buyers. If you won't sell for what they offer, the one down the street who is a little bit smarter, or a little bit more desperate, will. Sellers have little enough power right now without the deadline of foreclosure. People who need to sell have only the power to say no, and what happens if they don't say yes to someone? I'll tell you what happens: You get nothing. The chances are better of flying to the moon by flapping your arms than of getting some of your equity back out of a foreclosed property, even in the strongest of markets. Since your best alternative is lose everything you have in the property, that's not a strong negotiating position. This buyer does not have to have your property. They can go find a more attractive property, cheaper, from someone else. Their best alternative in negotiations is that they go find some other seller who will sell for what they want to offer. Negotiating position: Very strong. Net result, the buyer offers what the property is worth to them. If you won't take it, they only need a bit of patience to find something else that will. If you didn't need to sell, you could just hold on to the property, of course, but we've already determined that you don't have that option, and time is not your friend. A very large proportion of agents still have their heads in seller's market mode. Indeed, most of the major chains are still telling their agents to think like it's a seller's market. This kind of thinking is of no use in the present market, as residential property owners are re-discovering in San Diego County now that the things that drove the feeding frenzy of the last 8 or 9 months have cooled off. Even during that feeding frenzy, there were properties that didn't sell. which is a warning now that the market has cooled again. When you consider the time constraints of selling under pending foreclosure, it behooves you to understand your position. The sharks who buy properties for cash won't match the prices you get by selling through the normal marketplace. Ever. But even the normal marketplace does not reward you for being in a situation where you must sell. Caveat Emptor Original article here

The Difference Between Note Rate (APY) and APR

Fri, 20 Nov 2009 07:00:00 -0800

I am continually horrified how many people shop their loans by APR, just as I am by people shopping their loan based upon payment. Why? Because in either case, you're setting yourself up to spend a lot of money in closing costs that most people will never recover. But you shouldn't choose a loan based upon APR, just like you should never choose a loan based upon payment. There is always a tradeoff between rate and cost in real estate loans. If you want a lower rate, you're going to spend more in up-front costs to get it. This is a law of finance on the same order as the law of gravity, or Newton's laws of movement. Some lenders and originators have different tradeoffs, for better or worse, but they are always present. The question of rate should never be asked or answered on its own, but always in conjunction with the costs it takes to get that rate. If you keep a loan long enough, yes, you will eventually get back your upfront investment, but most people don't keep their loans nearly long enough. Let's illustrate by example. Picking a random rate sheet from one lender as I wrote the original article (rates are much lower now), I had one thirty year fixed rate loan with a rate of 5.00 percent, and assuming an existing loan payoff of $350,000, and rolling costs only into the balance, an APR of 5.484, and payment of $1993. Looks better at first glance than a loan at 5.625%, with a payment of $2056 and an APR of 5.764. As other alternatives, 6.00 percent is available with a payment of $2119 and an APR of 6.048, or 6.375% with a payment of $2184 and APR of 6.375. But here's what may not be apparent. As a matter of fact, it isn't apparent to most consumers. That 5.00 percent loan cost 4.8 points to get, and involved paying over $21,300 in total costs to buy the rate down that far. You're almost up against California rules limiting the total costs of a loan to 6% of total loan amount. The loan at 5.625% is done with a single point, and costs a grand total of $7070 to get done. The loan at 6.00% requires no points, and costs a grand total of $3500. Finally, the loan at 6.375% is a true zero cost loan. What this means is that that getting that 5.00 percent rate is a $21,300 bet that you will keep that property and that loan long enough that the money you save in interest every month will be more than that upfront cost. It takes 141 months for that loan to do that as opposed to the 5.625% loan - almost twelve years - when you consider time value of money. It takes 108 months - nine years - before it pulls even with the no points loan at 6.00, and 92 months - over seven and a half years - before it pulls even with the zero cost loan at 6.375%. The 5.625% loan (a $7000 bet) doesn't start in first place either, but it does get there a lot more quickly. It takes 55 months - four and a half years to pull in front of the 6.00% loan, and 53 months to pull in front of the zero cost 6.375% loan. That poor 6.00 percent loan for no points is the only one that's never the absolute best choice - it takes the exact same 55 months to pull in front of the zero cost loan as the 5.625 takes to catch it, but since you're only betting $3500, at least you've lost less if you refinance or sell before break even, which most people do. Last time I checked (a few months ago), the median age of mortgages in the United States was 28 months - just about half the time that any of the other loans takes to pull even with the 6.375% loan that doesn't cost a penny, either out of pocket or rolled into the balance. Let's consider how much money you'll be out if you refinance after 28 months with that 5.00 percent loan (or sell the property), like approximately half the population will. Your balance is $18,860 higher than the zero cost 6.375% loan, while on the plus side you have saved $1288 in payments. On the minus side, however, if you get another loan, you still have to pay interest on that $18,860. Whether it's because you sold that property and bought another, or a refinance loan comes along that you like better, it means a loan balance $18,860 higher even if you don't pay points on the new loan. You're still paying for your old loan, while all of your benefits stopped on the day you let your old lender off the hook by selling or refinancing. Admittedly, the chance of this happening is lower as you get to lower and lower rates, but it's still a bad bet, in my estimation. People not only sell, they want cash out, they want debt consolidation, the list goes on and on. If you get another 5% loan, you're paying $943 extra per year because of that higher balance. Alternatively, if you kept the extra in your pocket and invested it elsewhere, a 9% rate of return would mean it would cost you $1697 that first additional year. So far, I haven't worried about tax deductibility, but it works against the higher cost loan, making the picture even less favorable. I need to note that these were honest calculations. The ones you encounter won't always be. Sometimes, they're based upon the payoff balance - in other words, calculate the payment for that 5% loan as if you were going to pay all of the costs in cash, even though the loan officer probably knows that's not going to happen. This would allow them to quote a payment of $1879. It also assumes they're giving you an honest quote on your MLDS (California) or Good Faith Estimate (the other 49 states) is accurate, as the APR is calculated given that information. If the underlying document is inaccurate, and I've covered how badly lenders can legally lowball, then the resulting payment and APR calculations will therefore be too low. Now the difference between the two numbers, APR and APY, can give you a certain amount of information if you know how to use it, assuming that the loan officer tells you the truth, unlikely though that may be in some cases. I'm going to assume you've got a financial calculator or can do the calculations yourself, because none of the ones I've seen on the web are up to this task. Furthermore, this is only an approximation of the actual computation method, so there will be a small amount of slop in the calculations, but much smaller than the eighth of a percent fixed rate loans quotes are permitted to be erroneous. Using the term of the loan, the payment, and the contractual note rate (APY), tell your calculator to compute principal value of the loan - in other words, the new balance. This may not be accurate in and of itself, and that will tell you there's something funny going on with the numbers. Then repeat the calculation with APR substituted, which should give you the balance less the cost of loan, albeit with third party fees (appraisal, escrow, title) still in the amount as those are excludable from APR calculations under Federal Reserve Regulation Z. The difference in the two numbers tells you the fees the lender is charging - or the ones they're willing to tell you about, anyway. Note that the "spread" or difference between APY and APR gets larger as costs get higher or the term of the loan being contemplated gets shorter. The reason is that these costs have to be paid off over a shorter period of time. It also increases for smaller loans and decreases for larger ones. If you have to pay them off over fifteen years instead of thirty, the difference gets much larger. That 5.00 percent loan that had an APR of 5.484 with a thirty year loan term goes to 5.834 with a fifteen year loan term - not quite twice the difference, but nasty enough! Despite the fact that the person refinances about every three years, APR is always calculated upon the consumer keeping the loan for the full term, which isn't likely. Ninety-five percent of everyone has sold or refinanced within about seven years, and this number climbs towards an effective 100% for loans that begin adjusting before that. Sure, you could theoretically keep a hybrid ARM (although not a Balloon) after the adjustment, but nobody does. With that in mind, let's calculate APRs of each of these loans assuming you'll refinance after 36 months - significantly longer than the fifty percent mark where half of the country has refinanced or sold the property. The 6.375% zero cost loan still has an APR of 6.375 - because it has no costs to recover. The The APR on the 6.00 percent "no points" loan, which only has $1800 of non-excludable costs (see Regulation Z), doesn't go up much - to 6.391. The 5.625% loan you can have for one point jumps up to 6.643 APR, and the APR on that loan that the people shopping by APR or payment will choose - the one with a 5.00 percent contractual interest rate - skyrockets to 8.663%! If you only end up keeping it three years - beating out median age of loans in the country by better than 25% - this loan is the worst of the choices I have presented, not just by calculation of money spent, but even by calculating APR honestly. If I had to pick a few things I could pack into a sixty second public service announcement to tell all 300 million people in this country about real estate loans, the fact that they're severely unlikely to keep the loan for anything like the full term would be one of those things. People just assume that they're going to keep a loan for the full term, but then they don't actually do it. Meanwhile, all of the calculations that are made presume that they will, even though that presumption is nonsense, and making those calculations on that basis will actually cause many consumers to make erroneous decisions, because they paint the facts as something other than what they are. If gravity was a tenth of what it is, we could all fly in the manner of Icarus as described by myth. But those pesky facts keep getting in the way, and over half the people who take out thirty year financing don't keep it for even one tenth of the full term. If you're wasting nearly nineteen thousand dollars of your money every three years, as the people here did once, those facts will have an ugly tendency to bite you just as hard as they will any modern day imitator of Icarus. Caveat Emptor Original article here

What Happens When You Can't Make Your Real Estate Loan Payment

Thu, 19 Nov 2009 07:00:00 -0800

I've written a lot here about how to manage your mortgage so that you control it instead of it controlling you. Let's consider what happens when that project fails. If you don't pay your mortgage, on time, no big deal at first. The lenders don't like it, but there's a grace period built in. Make your payment within the grace period and you're golden. Fifteen days later, the first consequence is that you owe the lender a late payment penalty. It's a doozy, typically four to six percent, depending upon where you live. Here in California, it's four percent. Doesn't sound like so much, but four percent for fifteen days is the equivalent of ninety-six percent annualized interest, over three times the most horrible credit card I'm aware of. I don't like paying ninety-six percent interest, and neither should you. Don't get fifteen days late if you can help it. But once you've paid the penalty and brought yourself current, nobody knows and nobody cares. Suppose you get to thirty days delinquent - one full month. At this point longer term consequences set in. First off, your lender marks your credit as being thirty days late on your mortgage. This is a big negative as far as everyone goes, and can easily make a difference of 100 points or more on your credit score. Additionally, if you are applying for a mortgage loan (or plan to), you just got a "1x30". For A paper, this means that if your credit is otherwise perfect, you barely slide through. For subprime, this makes a difference on your rate. It takes two years for this to work its way out of affecting your mortgage application, even if your credit score recovers. Most people end up being thirty days late for several months in a row, each month hurting their credit score, before it goes to sixty days late. They missed one payment and struggle but manage to make several more before they miss another. Occasionally, they go straight to two months late. Either way, it's a Bad Thing. A single "1x60" might scrape through A paper if there's no cash out and your credit is otherwise perfect. Otherwise you are subprime for at least two years. In the subprime world, a "rolling 30" is generally not as bad as a 60 day late, but both are steps down from even a "1x30" and a "rolling 60" is worse. It gets worse yet if you pay your way current and then backslide again. And of course, you are paying penalties and interest is accruing on your loan and you're falling further behind every time you are late. This amounts to a notable chunk of change very quickly. So none of this is good. On the other hand, depending upon the state you live in, until you get to ninety or 120 days late the situation doesn't become dire. Each state's foreclosure law is different, but once the lender has the option of marking you in default, the situation gets uglier. It is a common misconception that lenders like foreclosing. In actuality, only so-called "hard money" lenders will usually start foreclosure immediately upon eligibility, especially if you've been talking to them about your situation. If they have some real reason to believe yours will eventually become a performing loan again, regulated lenders will cut you significant slack, by and large. It costs lenders a lot of money to foreclose and there's always the risk they end up stuck with the property, so they'll usually give you as much leeway as they reasonably can. One thing I keep telling people who want a loan approved based upon the equity in the property alone is "The lender doesn't want your house. They want to make loans that are going to be repaid. The lender is not in the business of foreclosure. They don't make any money on it." Nonetheless, even the most forgiving lender is going to eventually hit you with a Notice of Default. At this stage, things are starting to move towards a resolution that nobody likes, you least of all. At this stage, you are now liable for a large amount in extra fees that was written into your contract to cover the lender's cost of going through the foreclosure process. At this point, the lender has the right to require you to pay the loan all the way current, with all fees, in order to get them to rescind the notice. Refinancing becomes almost impossible, except with a hard money lender, and unless something about your situation has suddenly changed from what caused it to get to this point, that is only delaying the inevitable and making it worse. As soon as that Notice of Default is recorded, your situation becomes part of public record. You are going to get calls and letters and everything else coming out of the woodwork. One category is going to be lawyers, who will typically tell you they can keep you in the house a long time without payments by declaring bankruptcy. Well, this is true as far as it goes, but it's not going to make the situation any better. As a matter of fact, it will steadily get worse. Just because you go into bankruptcy doesn't mean that the penalties and fees and interest go away or stop accruing. They are still there, and they keep coming. I'm not a lawyer, and you should consult both a lawyer and an accountant if you are in this situation. Nonetheless, bankruptcy is not something I would even consider in this situation without something highly unusual going on. The second group that will contact you are the "hard money" lenders, looking to lend you money at 15% with five points upfront and a hefty pre-payment penalty, to buy your way out of the situation. Once again, unless something about your situation has suddenly changed, not a long term solution, and it only makes it worse. Another group that's going to call is investors looking for a distress sale. They want you to sell it to them for less than it would otherwise be worth. This is actually something I might consider. Yes, I lose some money, but that's better than going through denial with the lawyer for a year and a half while any equity I might have left gets frittered away in interest and fees and penalties, not to mention paying the lawyer. The final category, and one with a significant overlap from the previous, is real estate agents looking to sell the property for you. Assuming you're not deep in denial, this is probably the best option as to least unfavorable resolution. The drawback is that it depends upon whether somebody will make an offer in a timely fashion, a factor which is not under your control. No matter how great the price, no matter how hard my agent works, there might not be an offer. It happens. If you do nothing, eventually a Notice of Trustee's Sale will follow the Notice of Default. In California, there are a minimum of sixty days between Notice of Default and Notice of Trustee's Sale, and it easily be more. Seventeen days after the Notice of Trustee's Sale, the property gets sold at auction (unless you've somehow brought it current or sold the property). There are some protections in place here in California. The lender must perform an appraisal, and for the property to sell at auction, the minimum bid is ninety percent of this amount. Nonetheless, these are typically very conservative appraisals by design. At this point, the lender wants the property sold at auction, because if it doesn't sell, they own it, and they don't want to own the house. They are in the loan business, not the real estate business. So a house that may be actually worth $500,000 on the open market gets appraised at $400,000, and sold for $360,000. If the loan was for $250,000, that's $140,000 of equity you allowed to be taken from you because you were in denial, when you probably could have saved most of it. And if the loan with penalties and fees and interest was $450,000, that's worse, and not only because you forfeited $50,000 you could have gotten, and not only because they may be able to go after you in court for their loss in some situations. You see, because the lender took a $90,000 loss, they want to write it off on their taxes. And in order for them to do this, they have to hit you with a form that says you got away with $90,000 from them. This is taxable income!. As of this writing, there's a temporary tax law repealing it, but that repeal will expire, and your state may get in on the action as well. So normally, the IRS comes after you for the tax on the $90,000. IRS liens are one of the things that is not discharged by bankruptcy, and it stays with you forever. Ten years absolute minimum for any purpose. Sometimes your lawyer, CPA or Enrolled Agent will get you an "offer and compromise" that cuts your liability, but that's technically taxable income also and may be subject to another round of this crud. It it seems like to you the system is rigged so you can't win, you're right. The loan was an obligation you agreed to, and took the money for, and taxes are on obligation of anyone who is a citizen or resident. The smart thing to do? As soon as you realize that you can't make your payment, take a long look at your situation and decide if this is something that's going to get enough better to make a difference, or not. Then figure out how much equity in the property you have. If the situation is likely to improve, and you'll start making your payments in thirty days because hey, you just started your new job, that's one thing. Most of the time, however, most folks lie to themselves on this issue, for a variety of reasons. Remember: Denial Digs Deeper, and makes the situation worse. Even if selling the property isn't going to net you anything, it's still worth doing as it gets you out from under the sitation. Your credit score stops dropping, you quit getting marked late by your lender, you quit getting socked with penalties and interest and fees you can't pay. The IRS obligations you are incurring stop. Particularly if you have significant equity built up, the sooner you contact a real estate agent to sell, the better off you will usually be. You are going to lose the house if you don't sell. The sooner you sell, the lower the penalties and fees and extra interest you are charged by the lender will be. This translates into dollars in your pocket - dollars you are likely to need. If you can sell before the Notice of Default is filed, so much the better, as that's thousands of dollars right there. You don't have the luxury of taking your time about it, though. Taking the first reasonable offer is highly advised, and you have more time to get a reasonable offer if you start sooner. Once a Notice of Default is filed, it's a matter of public record and so your bargaining situation gets a lot worse because the buyer should know that you are over a barrel, metaphorically speaking, assuming their agent does their homework. Considering that it's two or three clicks of the mouse, it's easy homework to do and even the greenest new agent is going to catch it more often than not. Trying the various delaying tactics with a lawyer is likely to end up costing you more than a quick sale. Even if you remain in bankruptcy for five years or more, within about a year and a half at most, the lender will almost certainly persuade the court to cut the home and loan out of the bankruptcy as a secured debt, and sell it. Since the loans and penalties and fees and interest kept accruing all this time, you end up with less money - or none, along with a little love note from the IRS that says "You owe us thousands of dollars! Pay up NOW!" Every situation is different. At a minimum, consult a loan officer, lawyer, accountant, and real estate agent in your area. But when all is said and done, what I've talked about is the way most of these end up. Caveat Emptor Original here I've also got a "what happens next" kind of article called "Short Payoffs" up.

Joint Loans for Unmarried People

Wed, 18 Nov 2009 07:00:00 -0800

We aren't married. How do we buy a house together?

Basically, the same way that married people do. The qualifications are exactly the same, provided that you both will be living in the property. If not all of the people who will be buying will also be living in the property, they have to show that they can afford both the place where they are living and their share of the expenses of the property. The only real difference in the paperwork is that unmarried parties cannot submit a single loan application - they must fill out separate applications. Most lenders will require that all of the disclosures also be signed and submitted individually. But that's just to keep the lumberjacks happy killing trees. Now it is highly advisable that you consult an attorney as to how you want to hold title, and that there be some kind of partnership agreement that gives the other parties rights to recover any extra they paid to keep the partnership out of trouble, if one or more of the partners can not or do not make their share of the payments on time. But that's not a part of the purchase process, and you can certainly buy a property with basically anyone. It's one of the most basic of rights here in the United States. Convicted felons, jail inmates, illegal aliens, and people who have never set foot in the United States can all buy property here, as long as they have the money or can persuade someone to lend it to them. The fact that people are not married means basically nothing to the loan qualification process, either. The guidelines are exactly the same either way. Yes, there are complex variables as to how you qualify, and what loan you qualify for. But people who are married but aren't going to be living together are treated the same as two random business partners, except that they can put all of their joint information on one application. You can have any number of people on title to a property, or responsible for a mortgage. The major thing to watch out for is that they must qualify as a group, and almost always under the same set of qualifications. If one person has to do stated income, they all might as well be stated income, because they're not going to get full documentation rates anyway - or at least that was the case when we had stated income. The same thing still applies to credit: the weakest partner determines the loan qualifications you use. Caveat Emptor Original here

The Push Towards Bigger Loans: Why It Happened and How Consumers Suffered

Tue, 17 Nov 2009 07:00:00 -0800

One of the consumer attitudes I encounter constantly is the feeling that if you cannot afford the loan, the lender will not loan you the money. This safety zone common sense sort of reliance upon lender policy as a backstop is not only false, but one of the best ways to get in trouble with real estate there is. Even with lender meltdown going on, the only thing you're safe in assuming is that the lenders want their loan to be repaid in the event of default. Once upon a time it may have been true. Back in the dim times fifty years ago, lenders required down payments, and retained their loans for the full duration. This provided at least two levels of protection for the lender. First, if people did default upon their loan, that down payment was a cushion for the lender in that the property was genuinely worth more than the lender had at risk. All real estate loans were done "full documentation", where the borrower proved they made enough money to make the payments and repay the loan. Underwriting rules were designed to filter out those whose employment was not stable enough, those who couldn't afford the loans, and those whose creditworthiness was marginal. Of course, back then most folks worked for The Company their whole lives, too. At the same time, however, real estate was far more affordable. The inability to get a loan on good terms meant that you were a little further away from the middle class house of your dreams, that you were going to have to save a little more, work a little harder, and perhaps settle for something less than you really wanted, but you could still have a good property. 800 square feet on a fifth of an acre, instead of 1200 square feet on half an acre. These really were typical property choices available then. You saved until you had forty or fifty percent down, instead of twenty, and then you maybe had to look a little bit harder, but it could be done, and people paid cash for their properties all the time. A three or five thousand dollar property was something that people could save the money to pay cash for, even at seventy five cents per hour. That's not the case now. Even though people may make $40,000 per year, and the family has two incomes, they are not content with the lifestyle of fifty years ago that enabled people to save a down payment within a couple of years. Nor is employment as stable. People don't work forty years for The Company any longer. The changes on the lender end have been even more profound. Lenders discovered making stock valuations rise as a primary method of becoming wealthy. Where once the most important thing to the stockholders was to have every single loan repaid in full, now it becomes more important to have portfolio growth, which makes potential investors willing to pay more for existing stock. Then it became unnecessary to actually hold loans until they ran their course, as investors were willing to pay more than the face value of the loan for the rights to receive payment! Those nice dependable mortgage bonds were good as gold! Matter of fact, the money the lenders received by selling the loans was higher than they made by holding the loans. True, they might only make three to four percent from selling the obligation, as opposed to seven percent for the obligation itself, but they could do it in two to three months, as opposed to the entire year. In fact, they could go through the process four, five, or even six times per year: Receive a loan application, provide the funds on a short term basis, and then sell to investors for a three to four percent markup. Instead of earning seven to eight percent on their money per year, they were now earning twenty or twenty five. They could even retain servicing rights, as the investors had no idea how to run the loans, and make even more money. Stock prices would show the effects of growth, as investors expected them to be able to keep in up, and current stockholders could cash out for huge gains by selling part or all of their holdings. However, you now have a new group of stockholders, who bought - or held existing investments - in the belief that this growth curve could be maintained. They want that growth to keep going - however are they going to sell for a big profit if it doesn't? If the growth doesn't continue, how are performance awards to management going to be paid? And so it goes. Growth begets a need for more growth. Now there's nothing wrong with growth - quite the contrary - but when the expectations shift over time from a two or three percent annualized growth curve, to eight or ten or even thirteen percent, it creates an expectation that no one wants to fall short on. Furthermore, other people with money, seeing the rewards, join in the lending business. Joe made fifty percent in two years with Bank of Nowhere in Particular! Let's all invest in that bank! They'll double our money in three years! The fact of the matter is that there is only so much revenue growth that can be had in any given set of economic conditions. When you try to overshoot that amount, it can come from very few places. First, it can come at the expense of the competition. Unfortunately for that hope, the lending market grows more competitive, not less. Second, it can come from places that weren't a part of the market previously - in other words, people who were not good credit risks or who would not have applied in previous markets. The reason most of those would not have applied is that they are less credit worthy, and they know it as well as the lenders do. Third, growth can come through individual loans being larger, being willing to loan more money per property. This has also happened, but you cannot loan more per property without subsequently having more at risk, although the lenders have learned how to solve this. Remember that we discussed them selling the loans? Well, that's how the lenders limit their risks - by selling to someone else for cash. Let them assume the risks! So we have increased competition for borrowers, including those who may not have been as solidly credit worthy as a previous day's client. There are more lenders competing for limited pools of borrowers, and pressure to qualify the borrowers for increased loan amounts, because, after all, that's how the bank makes money. Furthermore, shifts in consumer habits played into this. People don't live in the same house for as long, and they don't keep loans nearly so long as they once did. Where they once lived in the same house from the time they bought it until they died, now the first house they buy in their twenties is a "starter," and then they sell that and buy a trade-up when the family expands a little, then another when they move up the corporate ladder, and this leaves out the effects of transfers and changing employers. Furthermore, they refinance and take cash out when they want a bigger SUV or a European vacation, and then they take more money out when the rates go down because they can afford a larger loan on the same payments. The increased prevalence and availability of the stated income loan has played right into this. Certainly, some people in your profession make that much, but what if you're not one of them? Simply say that you are! After all, you're in that profession, right? Furthermore, there is no payoff for telling people that they don't qualify. They've made up their mind that they want that three thousand square foot six bedroom house, and if you tell them they don't make enough, they're not going to give up their dream house! They'll just find another way to do it, so someone else will get that loan! That nice, wonderfully wonderfully large loan that means a huge commission check to the loan officer and a forty thousand dollar premium on the secondary market for the lender! Traditionally, the check upon this was the fact that the borrower had to actually make the payments on the loan once they had it, which limits their ability and willingness to sign for more loan than they can handle. However, competition between lenders once again found a way: First, the interest only loan, and then the negative amortization loan solved that problem for a while, particularly as sub-prime lenders made their qualification for the loan based solely upon the initial minimum payment. Whereas when A paper lenders underwrite a hybrid ARM that's interest only for a given amount of time, they will base their computations upon a fully amortized loan payment, and even assume the rate will rise, that was not the case in the sub-prime world. Sure they've bought the property on a 2/28 interest only loan with a three year prepayment penalty, and they bought in a flat or declining market, and they are not going to pay the principal down any in two years, and the property isn't going to be worth any more, so it's unlikely they will be able to refinance, and they certainly won't be able to afford the payments when they adjust, so they're going to lose the house, but hey! You got a commission check and your lender sold the loan (at a fat markup due to the prepayment penalty), and your employer won't have any money at risk when they do default! What's not to like? The Era of Make Believe Loans, as I call it, is now completely over. But how is a consumer going to protect themselves in that sort of environment? Obviously, you've got to start by figuring out a budget and sticking to it. This is hard. This is very unpopular, as far as real estate professionals go. When I sit down with people's finances and tell them what they can afford with a sustainable loan, the first words out of their mouths are usually, "I can't afford anything I want with that!" A certain percentage of them just walk out right there, sure that they can find someone else who will tell them they can afford more. As I've just covered, they certainly can find someone who will tell them that they can afford more. However, the reason I sit down and go through the numbers, including today's rates, what they make, how much they spend, is to show them precisely what they can afford. When somebody shows you real numbers and you deny those numbers, and are certain you can afford more, you are essentially performing magical thinking. "I want it and I deserve it, and this other guy tells me I can just pull myself up by my bootstraps and fly up to get it!" However, loans aren't magical. In fact, there is nothing magical about loans. You may get a negative amortization payment that you can afford for a while, but the money that you are not paying does not just vanish into thin air. It may be held in abeyance for a while, but it is there, and it will turn around and bite you. You wanted a $600,000 home for a $2000 monthly payment, and you got it for a little while. However, you now owe $680,000 and the property (which you put $50,000 down on) is now only worth $540,000. It doesn't take a genius to see what happens next. Even if the property increased in value by $100,000, it costs you $55,000 to sell the property and you have to pay $15,000 of their closing costs so that they can qualify for the loan, and that fifty thousand dollars you put down has turned into nothing. A rapidly increasing market, such as we had for several years ending about the end of 2004, covers a multitude of sins and mistakes. If the property doubled in price over three years, you came away with $400,000 and you were very happy! Unfortunately, this is not the type of market we are in now, nor are we likely to have that sort of market any time again in the forseeable future. It's always a bad idea to bet on it, because you never know it's going to happen ahead of time. So what are you going to have to do? As I said earlier, figure out what your real budget is in terms of purchase price and stick to it. If you can't afford anything you want, then want less. Insist upon sustainable loans, and qualifying for them full documentation. Full documentation loans have better interest rates anyway. Fully amortized loans, where you are paying principal and interest, have lower interest rates, as well, and if you stick with A paper guidelines (and 100 percent loans on A paper are possible for people with decent - not spectacular - credit), you get better interest rates and can usually avoid pre-payment penalties. "I just won't buy anything if I can't afford what I want!" some of you are saying. Right now, with prices retreating somewhat, it may even make a limited kind of sense for those with strong credit and stable prospects. However, the market here locally is not going to retreat that much more. Indeed, where prices are is currently being masked by a stubborn type of seller and a not very competent or honest stripe of real estate agent. It doesn't matter that three fourths of the sellers want $X for property of given characteristics, if the sales that are taking place are $100,000 lower. If this seller won't sell, someone else will, and it is the sale that actually happens that tells where the market is, not the hundred comparable properties where the asking price is $100,000 higher. However, real estate, even in markets that are rising just slightly, is such a fantastic investment due the the effects of leverage, that I've been telling people for two years that I do not anticipate the local market going much lower, and prices have been rising for the last few months. Indeed, very smart investors are swarming, intending to hold the property five years or so instead of flipping it. Yes, we've lost between twenty and thirty percent from peak prices, and as I wrote two years ago, I'm was starting to see evidence of a reversal in the not too distant future. People who decided to sit on the sidelines because they can't afford anything that they want have since discovered themselves to have been priced out of what they could have afforded then. If you've got a family of three and don't want a two bedroom condo even as a temporary situation, what are you going to do when you can't afford that? Caveat Emptor Original here

Debt Consolidation Refinance - Doing it Wrong vs. Doing it Right

Mon, 16 Nov 2009 07:00:00 -0800

There's a lot that gets written on this subject, mostly by loan officers looking for business. Well, don't think I'm not looking for business, but not with this post. Or if anybody calls me because of this, at least I'll know they understand how to do it right. The basic come-on is this: Your home has appreciated in value, and is worth more than you paid for it, so now you have equity on the one hand. On the other hand, you have loads of consumer debt, which is costing you hundreds or even thousands of dollars per month, which is impacting your lifestyle. So you borrow on the equity in your home and save money on your payments as well as causing them to be tax deductible in most cases, or at least so the traditional thinking goes. In actuality, it's only the actual purchase money where the debt is tax deductible, while cash out is not. My understanding is that the IRS has been starting to crack down on this. Let's illustrate the situation with some numbers. Let's say Arnie and Annie have a $300,000 loan on a home that they bought in 1998, and comparable properties in the neighborhood are now selling for $600,000. This is 300,000 in equity. On the other hand, because they are American consumers, Arnie and Annie have a hard time living within their means. They've got $15,000 in consumer credit, a $10,000 home improvement loan, and two new SUVs with associated debt of $20,000 and $30,000. These are fairly typical numbers. Arnie and Annie's mortgage payments are currently $1720 per month, because they refinanced to 5.25% in 2003 when the rates hit bottom. Their monthly payments on the credit cards are $400. The payments on the SUVs are $500 and $600 per month, respectively. The payment on their $10,000 home improvement loan for landscaping is maybe $150. Arnie and Annie are forking out $3370 per month without taking into account stuff like property taxes, insurance, utilities, etcetera. It's really cramping their lifestyle. Suppose they consolidate these loans into one payment on a thirty year home loan? All right, so it costs them anywhere from zero to $20,000 to get the loan done. Let's split the difference and say $10,000. That's about two points plus closing costs. This adds up to a $385,000 loan. When I originally wrote this article, that was a jumbo loan amount, but that is no longer the case. With a 30 day lock, that would have gotten you 5.875% or thereabouts when I originally wrote this on a thirty year fixed rate loan. The new payment: $2277. Voila! Despite the higher interest rate, Arnie and Annie are saving almost $1100 per month! Or are they? On the credit cards, their monthly interest was $225; their $400 payment would have paid the cards off in less than five years. The interest on the SUVs was $333 total on the two, and their payments would have had them done in about five years. The home improvement was a ten year loan but even so their monthly interest was only $75. Now these are all thirty year debts. The monthly interest on their old home loan was $1312. The interest charges on their home loan is now $1884, where total interest was $1945 previously. So they are actually saving money on interest. The difference is that now they're not paying the old loans off as fast - they've spread the principal over thirty years. In the meantime, the bank is getting all this lovely money in the form of interest from them, and if they refinance about every two years as most people seem to do, this is $85,000 more that they owe on their home, and that Arnie and Annie will pay points and fees on every time they refinance! Meanwhile, Annie and Arnie are quite often out charging up more debt they'll consolidate into their home loan, and they'll keep doing this trick for as long as they can. Let's assume Annie and Arnie beat the odds and don't refinance for five full years. This puts them ahead of 95 percent of the people out there. Let's look at where they'll be five years out if they make the minimum payment. They will owe $357,700 on their home. On the plus side, they will have had $66,000 to spend on other things (and they likely will, if they are typical Americans). Total debt: $357,700. If they had continued making their previous payments, they would now owe $272,100. Plus they would be done with the SUV's and the credit cards and would only owe $6600 on the home improvement loan which they could now concentrate on. Total debts: 278,700. Net difference: $79,000. Subtract that $66,000 they had real good time with (and nothing to show for), and they're still $13,000 in the hole. They do have a $572 per month potential additional deduction, assuming they are willing to risk the wrath of the IRS. Assuming they are in the 28% tax bracket and get to deduct the full amount, that gives them $9,600 less that they owe the government in taxes. Net amount Annie and Arnie are out are out: $3400, in addition to being set up for higher fees on future loans, and having a loan balance $77,100 higher. Additional interest they will pay because of the higher balance if they can get a loan at 5 percent even: $3855 per year. Sounds like an awful bargain doesn't it? Many consumers have done this three and four times, or more. I run across people who bought their home in the early 1970s, and have mortgage balances ten to twelve times the original purchase price. That's doing it wrong. Now I'm going to talk about doing it right. Suppose that instead of milking our equity for cash flow, where we're trying to minimize our monthly payments, we do it differently. Same situation, same numbers, but instead of spending that $993 per month, we use it to pay down our mortgage. Actually, let's pay $3300 per month, so we still have $70 per month to spend elsewhere. After five years, we still owe $286,600. We got $4200 to spend elsewhere. And all of our other debts are gone. In addition, we got that $9600 in tax reductions. Net amount to us versus the "do nothing" option: $5800, although we still owe $8000 more, and if we get a 7% loan, that'll cost us $560 per year. Notice that at this point, the benefits, while tangible, are still fairly small. Furthermore, if we refinanced or sold before this point, as ninety-five percent of everyone does, any benefits we may have gotten in the future disappear. But: If we keep making that $3300 payment after those five years, and don't roll anything more into the loan, then the mortgage is paid off and we are debt free - the house is paid off, and the other debts are history - in less than ten more years! Now this relies upon us being thrifty and keeping those old SUV's going and not charging up any more credit and not doing anything else to make the debt worse. In short, not giving in to the marketing culture, not forking over money you don't have, not running up the payments on consumer stuff again. Many people say they won't. Few actually manage it. So you see, even if you do it right, it takes years to show the benefits of this kind of refinance. This is years of doing something that they do not have to that most folks just won't do. If you have an unsustainable cash flow situation, by all means you've got to do something about it, but don't kid yourself that it's financially fantastic. On the other hand, if you're one of those who have to ability to make the scenario in the last paragraph (or something like it) happen, it's well worth doing. Now this hypothesis is highly sensitive to initial assumptions. I previously assumed that Annie and Arnie are and always have been top of the line borrowers, able to qualify for anything. Suppose they weren't? Suppose they were in a C grade loan at 7.25%, but now they qualify A paper at 5.875. With a payment of $2070 per month formerly, of which $1812 was interest, the new loan saves them $1450 per month in minimum payments and $561 in actual interest while still saving about $1209 on their taxes over five years. You'd have owed $288,000 on the old program, now even if you put in only the same $3300 per month in payments, you're $1400 ahead of where you would have been on the balance, and you still had about $400 per month to spend. On the other hand, if Annie and Arnie were A paper but now they are applying for a C grade loan, it cannot be justified on anything except "the cash flow keeps us out of bankruptcy!" because it's financial disaster. Some alert people will have noticed I didn't explicitly include the $10,000 cost of the loan in the computations of whether you're better off. That's because it is gone, sunk, included in the computations of where you ended up. It was part of your initial loan balance if you did it, included in the ending balance, and therefore included in the computations of whether you were better off. Now, if the cost of doing the loan were lower, there would be somewhat larger benefits a little bit faster, and indeed a lower cost loan is probably a better idea for most people, even though it means the rate and payment will be slightly higher. See my article on Why You Should Ignore APR for more. The important thing to remember is to not get distracted by the fact that your minimum monthly payment goes down, and see if you (and your prospective loan officer) can come up with a loan and a plan that really makes you better off down the line, instead of one that sucks the life out of you financially, like the vast majority of these scenarios do. Caveat Emptor Original here

How to Tell A Good Real Estate Market Article From A Bad One

Sun, 15 Nov 2009 09:00:00 -0800

Don Henley has a fun song off his second solo album called "Driving With Your Eyes Closed". I can't find a video performance, but here's an MP3. It's got a chorus that ends with the line, "You're gonna hit something /but that's the way it goes." A lot of what I read about the real estate markets reminds me of that song. Mostly, people are looking in a rear view mirror myopically, and think that's going to tell them where the market is going. Not so. Let me tell you the most important "secret" about the real estate market - or any other market. Short term results are mostly about mass psychology. People are so into what is happening right now that they will react to it the same way as everyone else without thinking, whether it's fear and greed driving the market up or fear and greed driving it down. The short term, in real estate, is this year, next year, and maybe the year after. But the actual real estate transaction is expensive. It can cost you a couple percent just for the transaction to buy real estate, seven to ten percent to sell, so you've got to clear ten to fifteen percent higher price just to break even on the costs. Those costs will more than pay for themselves, but they are there. An average year in my market is about 5% up, and 20% up in one year is one of the best years local real estate has ever had. Short term flippers work by different parameters than most consumers, but these are the market factors most people have to deal with. It takes about three average years to break even on the costs you have to pay for the transaction. This is enough to take the majority of real estate investing out of the frame of the short term market, controlled by mass psychology, and into the realm of the medium to long term market, where psychology is a factor, but as time goes on, more and more of your investment results are controlled by pure economics. Supply versus demand. How much people who want housing make. What the interest rate environment is like. Oh, and don't forget the effects of government and public policy. When somebody says, "The market has dropped in the last three months, therefore it's going lower" that is no more correct than the opposite which we had four or five years ago: "The market has been going up - five percent in the last three months alone! Therefore it's going to keep going up!" In either case, making this sort of claim is functionally equivalent to blacking out your windshield and driving by the rear view mirror. "You're gonna hit something, but that's the way it goes!" Furthermore, there is no such thing as a national market for real estate. It does not exist, and anybody who claims it does is either so clueless as to the nature of real estate markets that you should pat them on the head and say, "That's nice dear. Now run along and play with your Duplos&trade," or they are actively lying. There are factors such as the interest rate environment that influence real estate markets nationally, but there is no national real estate market. In order for a given area to be considered one market, the properties within them must be functionally equivalent for the residents as to location. Let's look at the City of San Diego: No way is San Ysidro, right by the Mexican border, functionally equivalent to Del Mar Heights, twenty-five miles away along the coast on Interstate 5 just north of all the corporate buildings in the Golden Triangle, and neither is equivalent to Rancho Bernardo, which is about that same distance north inland along I-15. All three are part of the City of San Diego, and we haven't even gotten to the suburbs yet, they are three very different markets, with different demographics, different lifestyles, different building styles and all that that implies. For my real estate work, I specialize in and around the City of La Mesa, which borders San Diego on the east, and is different from all three previously described areas, and there are areas of La Mesa which are decidedly different from other areas of La Mesa. These markets are close enough physically to have market interactions, but different enough to constitute different markets - never mind Idaho, Georgia, or Vermont, which are not part of the local commuting area. Talking about a unified countywide market is occasionally a useful fiction, as there are interactions. People are able to commute from home to work and back again, no matter their respective locations within the county. Talking of a national real estate market is blatant nonsense. At most you can talk about a national amalgamation of local markets - a statistical hash of what is going on in all of the individual markets. Even right now with real estate markets in the tank in all the headlines, though, there are local real estate markets that are doing very well, and others that are poised to do so. You can talk about national factors influencing all of the local real estate environments. Interest rates, lender requirements, legislation in Congress, federal rule-making in general, all of these have a national influence. The markets themselves remain local. For longer term analysis, you've got to talk about the economics of an area. Current supply versus demand, and where that ratio is going. What do people in the area make? What is the regulatory environment? How difficult is it to build more housing? What are the population trends? What is the economy of the area doing? What are the factors influencing rental price and availability? How likely is any of this to change in the future? It doesn't matter whether people are getting "priced out" or even how many people are getting "priced out." People have been priced out of Manhattan for decades; it hasn't stopped Manhattan real estate from rising in value. What does matter is whether enough people with the economic ability to pay the current prices are available to buy up the new inventory that hits the market. It doesn't matter that people who bought twenty years ago could not afford to buy their properties at current prices. What does matter is that enough people who can afford it will buy to more than balance out the people who want to sell at current prices. So while you can talk about national trends, any given property sits in a particular local market, and any discussion of whether to buy a given property has to be rooted in the local market situation. National trends may have an influence upon its value. If interest rates go to eight percent, people can only afford about seventy percent of the loan they can afford if interest rates go to five percent, so falling interest rates are a time of rising prices, other things being equal. Of course, we've had falling interest rates the first three months of 2008, and that's not the case. The explanation is that there are stronger factors at work. Nonetheless, if a million people want to own property in an area (say, La Jolla) and only 40,000 people can, then the price will be determined by the 40,000 people willing and able to pay the most. If twenty million people want to live in San Diego County and only three million can, the prices will be determined by the three million people willing and to pay the highest prices. End of discussion. Not all properties in all locations are equally valuable of course, but the mix will be determined by what prospective buyers are willing to pay the most for. Note that not all costs are in dollars. Sometimes it's opportunity cost, sometimes it's any number of other costs, such as the risk of earthquake, the heat when the Santa Anas roll in, etcetera. Some people absolutely require living in a six bedroom 3000 square foot house, and if they can't afford the prices those command here, they'll go elsewhere despite the fact that they could easily afford something less expensive. Others will put up with living in a broom closet so long as they can go surfing every day. Analysis focusing on a market's short term results are largely a study in mob psychology. A few years ago when property was overpriced locally, I couldn't slow people eager to follow the other lemmings with a locomotive. The last year or so, with available property prices well below historical trendlines locally, it's taken entire battalions of wild horses to pull people off the sidelines due to media coverage. But mob psychology is a changeable thing. A co-worker and I were talking about modifying an old T shirt the other day. The original version has two vultures sitting on a tree limb, discussing the negative utility of patience: "Patience MY ASS! I'm going to KILL something!" (pardon the vulgarity.) We're going to change the second line to "I'm going to BUY SOMETHING!" That's the mood of the market we're encountering now. The people who have been holding off seem to have realized that this is about as good as things are going to get for them. Maybe they're tired of waiting. Maybe they've realized things are more affordable for them now than they were in 2000, let alone 2004. Maybe they got "priced out" during the bubble and want to move before it happens again. Once you buy, it's not like the seller can come back and ask you for more money later because it turned out to be such a wonderful bargain - you're locking in your cost of housing. Putting it under your own control forever. The vultures are starting to swoop. Analysis on a local market's longer term prognosis have to ignore mob psychology. It's unpredictable on that scale, and nobody ever knows just when it will turn, or how. But there's only so long mob psychology can trump practical economics, which is the norm that any particular market will follow ever more closely the longer you run the experiment. With the recent decline in values, San Diego has dropped significantly below long term value trends and is still below them even with the recovery that has started. This means that considering current supply and regulatory barriers to increasing it, demand of people who want to live here, the values that those people can afford to pay, and increasing demand for housing in San Diego, not to mention the changing dynamics of the rental situation (be prepared for rapid increases in rental rates), right now is an excellent time to buy, as prices are below where you would expect, given the longer term factors influencing the San Diego regional housing market. Articles which consider only short term price fluctuations are looking backwards as we go into the future. They're looking at where we've been, not where we're going. And as always when you're effectively driving with your eyes closed: "You're gonna hit something, but that's the way it goes..." Caveat Emptor Original article here

CBB: The Art of Setting Buyer's Agency Compensation on a Listing

Sat, 14 Nov 2009 08:00:00 -0800

First off, let me make something very plain. All a CBB (Cooperating Buyer's Broker compensation) can do is give good agent an incentive or disincentive to look at the property. A high one will not, by itself, sell the property. A low one will not completely prevent it from being sold. Buyers, being interested in their own bottom line, will persist in choosing the property that offers them the best property for their purposes at the lowest price, and agents with about an hour in the business should understand this. I not only cannot sell a buyer on a property that isn't at least as good a bargain for them as the competing properties, I won't try. It's contrary not only to my client's interest, which should be the ultimate consideration of any agent, but it's not in my interest either. Now with that said, you really don't want to do is give agents a reason to sell the other property instead of yours. A cheap CBB does not motivate the agents to work. Suppose a boss told their workers "You will be paid $10 for every green widget you sell. You will be paid $15 for every purple widget you sell." Assume the widgets are identical in every way except color. How many green widgets do you think would get sold versus purple? Sure, they'll sell green if the customer wants it, but that's not going to be what they suggest first. If a customer came in the door wanting a green widget, they'd get a green widget. But if they walk in the door and aren't sure they want a green widget, the sales staff will quite predictably see if they can sell them the purple widget first. If they can, the green widget sits unseen, untried, and unsold. In real estate, the person who sets that compensation is the owner of the property. There are lots of properties out there, even in a seller's market. Do you want your property to be treated like a green widget, or a purple one? This isn't evil. Agents have to eat, pay the mortgage, pay expenses, etcetera, and we don't make as much money as people think. Even less so than most people, agents don't get to keep every dollar their company gets paid for their services, and they don't get paid instantly for waving a magic wand. It takes time, work, and expertise - I've spent six months, hundreds of hours, and over a thousand dollars just in immediate expenses working with clients to close a deal. If the company gets paid $10,000 and the agent has an 80% split (better than most), they get $8000 gross. Less monthly desk fees, less per transaction fees, and less fixed expenses of staying in business, that's maybe $6500, and social security eats twice as much of that as normal, leaving about $5400 - and we haven't even considered income taxes or advertising yet. For a solid month of work, and who knows how much time looking before the clients made the offer that was accepted. With practically unlimited liability, and requiring continuous training and work to keep their edge. If it takes 3 months in all, that's barely minimum wage, and most agents work sixty hours per week at a minimum. Quite often, we've got to reduce our commission to put some money back into the transaction so it can close. Sound like a cushy sinecure to you? Of course, most agents are working with more than one set of clients at a time, but as you can see, a $10,000 commission doesn't translate into a huge windfall for the agent. If the company only gets paid $8000, that translates into maybe $4100 that the agent can use to pay their family's living expenses and taxes. Which do you think they'd rather have, the bigger check or the smaller? Ask yourself what you'd do in their place. If it's a question of the smaller check or nothing at all, there's no question, but there are a lot of properties competing with yours for the available buyers, and more coming onto the market all the time. Do you want to give agents a reason to try and sell your property, or a reason why they'd prefer to sell someone else's property? With all of this in mind, a screaming deal will sell. You don't have to worry about whether or not the agent is going to be on your side. Buyers will beat a path to your door, with or without an agent. However, pricing your property as a screaming deal is not something most rational owners want to do. They want to get top dollar for that property, and it takes at least ten percent below the rest of the market - more likely fifteen - to get attention as a screaming deal. I've said this before, most notably in How to Sell Your Home Quickly and For The Best Possible Price, but this is fifteen percent off the correct asking price, not the owner's fevered dreams of greed. The average CBB around here is three percent. So, save three percent to lose fifteen? Not something I'd do. Furthermore, you're not going to put up a CBB of zero, no matter how low it's priced. I've explained before why the seller pays the buyer's agent. Finally, if you end up needing to give the buyer an allowance for closing costs to get the property sold, you're quite likely giving out with the other hand the same money you withheld in the first place, as buyers paying their agent is a closing cost. Why not put it out there in the first place, where it is likely to do you some good? The differences a higher CBB makes for the seller are three: You don't have to worry whether buyers needing to come up with cash to close to pay their agent will impact buyer cash to close, you get more attention for your property more quickly and more consistently, and you don't have to worry about buyer's agents creating reasons not to buy your property. Put yourself in this situation: Most buyers are reluctant to pull the trigger on a half million dollars. They need some good hand-holding and reasons to buy, and instead, their agent is looking for a reasons to help convince them why they want to buy some other property instead. Do you think it might take longer for the property to sell? With carrying costs of somewhere around two-thirds of a percent per month for most properties, if a CBB a half percent higher gets the property sold three weeks faster, you are ahead of the game. The time difference will almost certainly be more than that, and - statistical fact - the longer your property sits unsold, the lower the price it will sell for. If you want to offer a low CBB, that's your prerogative. The property had better sell itself enough better than anything comparable to still the doubters - and practically every buyer is a doubter. The lower it is, the worse it will be, the longer you'll have to pay carrying costs, and the lower your final sales price. A low CBB, especially in conjunction with other factors about the listing can advertise to buyer's agents that you aren't ready to sell yet, warning them of a difficult transaction. If I can find a model match with an obviously motivated seller around the corner, why should I take my buyer to yours? We're going to get a better price on the same thing with the property around the corner, there will be fewer issues with the transaction, and the fact that I'll make more money even though my client got a lower price is pure bonus for being a good agent. Call it karma. On the other hand, offering a significantly higher than average CBB doesn't work as well as some people seem to think it does. It definitely won't sell the property for more than it's really worth. Furthermore, it raises all kinds of red flags in my mind, and, I imagine, in the eyes of most agents. "Why do they think they need to offer five percent when the average is three?" springs to mind pretty much unbidden. Most often, the property is overpriced. Almost as often, there's something wrong with it that only an experienced investor is going to be able to deal with - and experienced investors don't pay top dollar for a property. Ever. Quite often, there's something unrepairable detracting from the value of the property. It might get the property sold much more quickly - most agents have some investors I can call if we have reason to, and if you get our attention with a high CBB, both we and our clients are happy. So if you're stuck with a property that has something seriously wrong with it, a high CBB and a low price will cause it to see a lot more action. But they have to be coupled together. High CBB won't do it on its own. On its own, high CBB is pointlessly wasted money. An average CBB or maybe slightly higher will quite likely accomplish what you want; a quicker sale and therefore a higher sales price. If you're a half percent above average, that's not enough to raise red flags, and it will get you attention. Good buyer's agents will still require that it be an above average value for the client, but they will look, where they might not otherwise. It also stands a good chance of motivating them to really take a good long look at the property. Short Sales are worse than everything else, as far as CBB goes. Short sales usually take much longer, are more often than not overpriced, and there's a much higher chance of transaction falling apart and the agent losing the client as a result. In my area, over eighty percent of all short sales fall apart, and there's not much the buyer's agent can do to alter the odds - it's in the hands of the listing agent. The lender is going to require the agents involved to reduce their commissions. Agents know this, and they can't really fight it. If you're out there on the cheap end of CBB before the lender wants to grab money we've earned away from us, and four out of five self-destruct and lose the client without closing, what reason is there to show your property, as opposed to the one down the street that's not a short sale? Cost my client money and time to no good purpose, when I can usually find them something just as good at a better price that closes faster and without the eighty percent chance of fallout. But there's always a reason for a short sale. I've never seen one yet where the owner didn't need to sell for some reason or another. Why doesn't matter; If a short sale is the least bad thing that can possibly happen to you, the one thing you don't want is for the property to fail to sell, and a below average CBB on a short sale will practically insure that the property won't sell. If I had my druthers as a buyer's agent, I'd rather buyer's agency commission be set as a flat amount, regardless of the actual sales price, so that the agent isn't shooting themselves in the foot if they can negotiate a better price. On the other hand, it's not a crime for the seller to structure it in a way that produces dissonance between the interests of the buyer and the interests of that buyer's agent. I may not like it, but I take shameless advantage of it when I'm listing property - I advise owners to make CBB a percentage. Just because I understand a happier client is likelier to bring me more business doesn't mean every agent does. Maybe it's because I read Sun Tzu and von Clausewitz at an early age, and military history has always been an avocation with me. Maybe it's because I took almost enough probability and statistics courses in college for it to count as a major. Maybe I'm just competitive by nature. Whichever it is, I believe in taking every opportunity to load the dice in my client's favor before they get tossed. Anytime there are large amounts of money at stake, you're either in it to win or you are a sucker. There's a lot more money involved in real estate than almost anything else. At higher valuations, reasonable agents expect CBBs to go down. There's not much difference in the actual work between a half million dollar property and a full million dollar one. Higher liability exposure and a little more hand holding and a little more service. Furthermore, the kind of people who buy million dollar properties tend to be better qualified to do so, leading to fewer escrows failing due to buyers failure to qualify. One of the things I don't understand is that many agents are the worst about CBB. They should know the power, and yet when it comes to their own money they disregard the facts and try and to do it on the cheap. I make a special note when I notice those listings, because it's like they're shouting, "I'm just out for a quick buck! I don't really know what I'm doing!" to those with the ability to hear it. With that information, I keep a special eye on their listings for other clients. Just part of my desire to look for opportunities to depth charge fish in a barrel. When I find one, it always results in a happier client. Caveat Emptor Original article here

Sourcing and Seasoning of Funds

Fri, 13 Nov 2009 07:00:00 -0800

People sometimes ask, "Why should the lender care where I got the money for the down payment? I earned it, it's mine - cash is cash!" They're right as far as they go. In general, the lender doesn't care whether you got your cash. For all they care, it could have been by selling off your first-born child, moonlighting as a drug dealer, or embezzling the funds from your employer. It's not usually a good idea to get a real estate loan if you're facing criminal charges (and you must disclose it if you are), but if you aren't facing charges, the lenders don't really care. What they do care about is money appearing for no known reason just prior to purchasing real estate. They want to make certain that cash is really all yours. Quite often that money is an undisclosed loan, on which you are going to have to make payments, which are going to influence your debt to income ratio. Debt to income ratio is the most critical measure of loan qualification. If you're going to be making monthly payments of $400 to pay back the person who loaned you that money, the lender is required to consider whether the money you are making is going to enable you to pay back that loan as well as their own. So the lender is going to want to know where any sudden influx of money in the last few months came from. This is called "sourcing" the money. They want to know where it came from. Did you sell another property? Then they want evidence, in the form of a HUD 1 that shows that money. Did you get a bonus? Let's see the remittance advisory. Did you sell stock? Did you sell your collection of rare Roman gold coins? Each of these has paperwork to attest to the fact, and the lender will want to see that paperwork. If some friend or family member wants to make an actual gift, that's fine also. What the lender will require is a letter from that person stating that this money is a gift and comes with no strings attached. What they're looking for is an explanation that doesn't involve the money being obtained through a loan. If you've had the money for a while, or have been building it up over time, your account statements will demonstrate that fact. Six months ago, you had $100,000. Since then, you've saved another $3000, earned another $5000, and your balance is now $108,000. This is called "seasoning" the funds. Nobody wants to have a loan sitting around longer than necessary - particularly not a loan for a significant amount of money. Seasoning the funds reassures the lender that this is not an undisclosed loan. Suppose the money in your checking account that suddenly appeared two weeks ago is a loan? That isn't necessarily insurmountable. Let's get the loan paperwork out there where the lender can see it, examine the repayment schedule, figure out what it does to your ability to make the payments on this new real estate loan you want. If you qualify by debt to income ratio with these payments included, it's pretty likely your loan will be approved. There are exceptions, but I'm going to let those go uncovered, because I'm not real big on telling the general public how to get fraudulent loans accepted. There might be politicians reading this, and letting them know all the answers to that would be irresponsible of me. The main reason why we have to source and season cash in every transaction is quite simply so people aren't able to hide the fact that they've recently gotten a loan. It seems paranoid at first, but it isn't paranoia if people are out to get you, and lenders have gotten burned many thousands of times over this point. People quite often don't even think it's wrong to keep silent, even though it is fraud. So if the lender doesn't require sourcing and seasoning of funds, the lender grants the loan based upon known information, only to later discover that the borrower is unable to make payments due to also needing to make payments on an undisclosed personal loan. Neither the lender nor the FBI fraud unit are very happy if that happens, and neither will you be. Caveat Emptor Original article here

Steering: The Most Violated Law In Real Estate

Thu, 12 Nov 2009 07:00:00 -0800

I just picked a random ZIP code in my local MLS, and out of the first twenty listings I came to, ten had explicit violations of one or more of the sections of RESPA regarding steering right there in the listing. This did not include lender-owned real estate, which has its own set of issues in this regard. All I did was count two common violations. The first was "Buyer must be prequalified by X", where X was some loan originator. In a way, I understand this. Forty percent plus of all escrows locally are falling out, and the vast majority of them because of unqualified buyers who cannot qualify for the loan. This wastes a minimum of about a month, plus when it goes Active again, it looks like it's been on the market for longer than it really has. Bad thing all around for the seller. The justification used is that for some reason, the agent trusts that particular loan officer to render a real opinion. Perhaps occasionally, a lender owned property will even try to require prospective buyers to prequalify through them. While it might seem reasonable, here's some relevant law from RESPA

Business referrals No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.

They mean that "any thing of value" bit, if you peruse down to the definitions. It's defined very literally by about a paragraph of text that boils down to four words: ANY thing of value. You refer business to them, they give you approvals you can count on. It doesn't matter if you require "only" a prequalification - they now have the prospective borrowers information, including credit information and home telephone number. This means that even if there's no application fee, no deposit, not even a credit report fee, you have still given that loan originator a "business relationship" with the borrower. That makes for legal consideration on both sides of the equation, and both the originator and agent are guilty. This is just as hard a violation of RESPA as a fraudulent HUD 1 form. It hasn't been enforced much of late, but I believe that the State of California could probably put over half the brokerages and lenders in the state out of business over loan steering. I only counted four out of twenty actual explicit requirements to pre-qualify with a specific lender this time, while the last time I conducted the exercise it was eight. Maybe it's getting better, maybe it's not, but twenty percent of a representative sample of listings having an explicit violation of the law right there for everyone to see is not something agents should be proud of. When it comes to holding someone responsible for their representations, pre-approval doesn't mean anything. If you're a real estate agent who doesn't do loans, talk to a lender you trust about necessary information to determine whether a loan is doable. I've created a special form that I send to agents making offers on my listings. Nothing in the way of personally identifiable information except the borrower's name - no social, no contact information - but it does have credit score, late payment history, income information, etcetera, to the point where I can tell whether or not I could do the loan on the terms necessary to make the transaction fly. Furthermore, it does require the loan officer to sign a representation that they aware that a decision as to whether or not to grant credit - in the form of agreeing to enter escrow - will be made based upon this information. They don't need to make representations of opinion - all I'm asking for is verified facts. Armed with those facts, I have a pretty darned good idea if this borrower is capable of consummating the transaction. Doesn't tell me whether they will or not, but that's not what wanting a prequalification or preapproval is about. But when I'm a buyer's agent, which is most often, I simply ignore these requests that violate the law. Furthermore, this puts me in rather a strong negotiating position if the listing agent repeats the request or brings it to my attention. Now they've compromised their client's interests, by giving the other side (me) a concrete legal issue to aim at them. Game, set, match. As I said, four out of the first twenty listings in a random ZIP code explicitly violated RESPA right in the listing, without counting the ones that say "Contact us prior to making an offer," where that's usually what they want. Four out of twenty where there is precisely zero doubt that they're violating the law. Actually, that wasn't the most common violation, either. That goes to "Seller to select all services," at six out of twenty - thirty percent. Also from RESPA:

Sec. 2608. Title companies; liability of seller (a) No seller of property that will be purchased with the assistance of a federally related mortgage loan shall require directly or indirectly, as a condition to selling the property, that title insurance covering the property be purchased by the buyer from any particular title company. (b) Any seller who violates the provisions of subsection (a) of this section shall be liable to the buyer in an amount equal to three times all charges made for such title insurance.

Even though in California the seller usually buys the title insurance for the buyer, I've had more than one lawyer tell me that failure to negotiate is construed as a violation of RESPA by the courts. It works like this: In the case of simultaneous owner's and lender's policies from the same company, there's a discount for the lender's policy, essentially requiring the lender's title insurer to be the same as the owner's title insurer. Since this happens on every purchase transaction where there's a loan, you have the requirement to negotiate. Seller and buyer negotiate until they come to a mutually acceptable compromise. Neither one of them gets to dictate to the other. Furthermore, failure to consider the best bargain for the client is a violation of fiduciary duty for the agent. It's not the sellers who want to choose services. Other than corporate owned property - lender owned and corporate relocation properties - there just isn't a reason for many sellers to care. The only reason is if they're employed by a title or escrow company, and their fringe benefits include free title or a free escrow. I've seen that once in the last four years. What's really going on here is title insurance companies providing free farms, or subsidized mailings, or any number of other freebies they use to attract real estate agent business. Or the brokerage has a captive escrow company they're required by the broker to use, despite the fact that failing to negotiate this point is a violation of the law. I've had agents or their idiot assistants tell me that they get "discounted service" even when I've got a lower quote from the competition. Furthermore, the interplay of title company and escrow company is important. If there's no common ownership between the two, the title company will charge a "subescrow fee" that I've seen be anywhere from $100 to $450 (usually about $350) because they're the ones who are actually set up to accomplish some things that are legally the escrow company's responsibility. For instance, recording. What this means is that even if the actual quote is lower from unaffiliated companies, the clients are quite likely better off choosing escrow and title companies where there is common ownership, even if the quote is a little higher - because there won't be subescrow fees, and quite likely not messenger fees between title and escrow. To paraphrase an common saying, $350 is $350, even when there's a half million dollar deal happening. Make certain you get a guaranteed total fee for services quote based upon the actual escrow and title relationship to each other. I'm quite sorry for independent escrow companies - I have no reason to believe they're any less competent or charge anything more than title company affiliated ones - but they're competing at a disadvantage because the title company wants to charge more to work with them, and this is quite reasonable given that they will be performing services that are the escrow company's responsibility. They waive subescrow for their own affiliated companies simply because, one way or another, they're responsible for the work. I've also heard all sorts of nonsense about competence of title and escrow officers. The fact is that most of them are perfectly up to your transaction. Even corporate owned relocation properties, where there may be some complex tax issues, aren't significantly more complex than your garden variety individual buyer - individual seller, and don't get me started about 1031 exchanges, which are perfectly straightforward from escrow's point of view. Any good agent's agenda is very simple - competent service providers for the lowest total price. The vast majority of the time, this means a title and escrow company with common ownership. Note that I don't care which title company and affiliated escrow company. I'll do business with anyone that hasn't hosed a client, and even if they have, I'll simply require a different title or escrow officer - just because John has a recto-cranial inversion doesn't mean Jane, another officer at the same company, does. Even lender-owned property will negotiate service providers if you approach it right - which is how it should be. Oh, you'll end up with their choice of providers most of the time, but you can get them to pay for subescrow and messenger fees, and quite likely an allowance to meet your lowest quote elsewhere - meaning your client doesn't really have a reason to care. Essentially the same product at the same price to them. Why would most clients raise a fuss about that? Indeed, the only thing worthy of most clients raising a fuss would be if you didn't negotiate for that. Indeed, explaining the whys and wherefores of the whole service provider quandry has gotten me a seller or two working at cross-purposes to their listing agent, who had someone all picked out without informing their seller. When this happens, my buyer wins. How could I not use every weapon at my disposal? The intent of Congress on steering is quite clearly spelled out:

TITLE 12--BANKS AND BANKING CHAPTER 27--REAL ESTATE SETTLEMENT PROCEDURES Sec. 2601. Congressional findings and purpose (a) The Congress finds that significant reforms in the real estate settlement process are needed to insure that consumers throughout the Nation are provided with greater and more timely information on the nature and costs of the settlement process and are protected from unnecessarily high settlement charges caused by certain abusive practices that have developed in some areas of the country. The Congress also finds that it has been over two years since the Secretary of Housing and Urban Development and the Administrator of Veterans' Affairs submitted their joint report to the Congress on ``Mortgage Settlement Costs'' and that the time has come for the recommendations for Federal legislative action made in that report to be implemented. (b) It is the purpose of this chapter to effect certain changes in the settlement process for residential real estate that will result-- (1) in more effective advance disclosure to home buyers and sellers of settlement costs; (2) in the elimination of kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services...

(emphasis mine) Whatever forms those kickbacks and referral fees may take, if your agent is violating this, do you really want to do business with them? Caveat Emptor Original article here

Project VALOUR-IT

Wed, 11 Nov 2009 23:11:00 -0800

(This will remain on top through Veteran's Day. Scroll down for daily posts) I think that one charitable fund raiser per year is both reasonable and an absolute limit, so I have to be very picky as to which one I choose. I could choose the San Diego Zoo, American Red Cross or many other worthy charities. The one I have chosen is more important than that. Project VALOUR-IT helps disabled troops who have lost the use of one or both hands in action. It can't replace those hands; what it does is enable them to connect to the internet and use a computer, both of which are becoming ever more essential parts of daily life. They stepped up to the line to defend you, your family, and even the jerk who runs this website, and for the rest of their life they are going to suffer a disability that is becoming more important to all aspects of living a normal life. I believe that helping these people live a life that is as normal as practical is the absolute minimum we can do. There are NO ADMINISTRATIVE COSTS to this program. Every penny goes to buy these laptops, which the manufacturer sells at cost or even a touch below. Prevent this shame from happening to us. Please. The Last of the Light Brigade There were thirty million English who talked of England's might, There were twenty broken troopers who lacked a bed for the night. They had neither food nor money, they had neither service nor trade; They were only shiftless soldiers, the last of the Light Brigade. They felt that life was fleeting; they knew not that art was long, That though they were dying of famine, they lived in deathless song. They asked for a little money to keep the wolf from the door; And the thirty million English sent twenty pounds and four! They laid their heads together that were scarred and lined and grey; Keen were the Russian sabres, but want was keener than they; And an old Troop-Sergeant muttered, "Let us go to the man who writes The things on Balaclava the kiddies at school recites." They went without bands or colours, a regiment ten-file strong, To look for the Master-singer who had crowned them all in his song; And, waiting his servant's order, by the garden gate they stayed, A desolate little cluster, the last of the Light Brigade. They strove to stand to attention, to straighten the toil-bowed back; They drilled on an empty stomach, the loose-knit files fell slack; With stooping of weary shoulders, in garments tattered and frayed, They shambled into his presence, the last of the Light Brigade. The old Troop-Sergeant was spokesman, and "Beggin' your pardon," he said, "You wrote o' the Light Brigade, sir. Here's all that isn't dead. An' it's all come true what you wrote, sir, regardin' the mouth of hell; For we're all of us nigh to the workhouse, an, we thought we'd call an' tell. "No, thank you, we don't want food, sir; but couldn't you take an' write A sort of 'to be continued' and 'see next page' o' the fight? We think that someone has blundered, an' couldn't you tell 'em how? You wrote we were heroes once, sir. Please, write we are starving now." The poor little army departed, limping and lean and forlorn. And the heart of the Master-singer grew hot with "the scorn of scorn." And he wrote for them wonderful verses that swept the land like flame, Till the fatted souls of the English were scourged with the thing called Shame. O thirty million English that babble of England's might, Behold there are twenty heroes who lack their food to-night; Our children's children are lisping to "honour the charge they made-" And we leave to the streets and the workhouse the charge of the Light Brigade! Rudyard Kipling Please help if you are in a position to do so

Racial Gap In Home Loans

Tue, 10 Nov 2009 07:00:00 -0800

Racial Gap in Loans Is High in California. I can give a variety of reasons for this. First off, especially in Los Angeles but to a lesser extent throughout the state, there is a huge "Spanish speaking only" community. When you limit yourself to speakers of a language which isn't the nation's primary business tongue, you limit your ability to find loan officers who will treat you honestly and fairly and find you the best possible loan. I speak reasonable spanish myself, but not nearly enough to do a loan. Second, those who speak spanish only are ripe pickings for unscrupulous loan officers and real estate agents. Because they do not understand english, the language the regulations are written in, they have less understanding of what is a complicated and confusing process for anyone who is not a practicing professional. In fact, I can name a lot of alleged professionals who speak English and are nonetheless limited in the comprehension of the process to judge by the evidence. Third, those who speak Spanish only have a lesser understanding of their rights under the law, and since the vast majority of all loan documents are in English (a few lenders are starting to generate a few documents in Spanish, but not every document, and it will never be the main copy of anything), they have a lesser understanding of what they are agreeing to. (Gee, I hope the preceding helps the "Spanish only" lobby of separatists understand what they're setting up for the people whose benefit they are allegedly advocating.) But more importantly than all of the preceding, real estate and loans are "sales connection" businesses. Because most people do not shop for homes or home loans in a rational fashion. "I can't be rational! This is far too important for that!" Seems silly, but it's true. People buy or do business with you because you have made them more comfortable, or because they think you can do something nobody else can or will for them. They do business because they connect with you on some level, not because what you're offering is the best thing out there. Identity politics exacerbates this. There are agents out there (often but not always necessarily of the same ethnicity) whose niche market is "black folks", or "Spanish speakers" or "Koreans". Some people will do business just because you're the same, or because they feel some kind of cultural connection. Others will do business because that agent or loan officer helped their brother, or friend, whether said brother was the toughest deal in creation or the easiest thing they ever did. And if your brother had to do something, or had something happen, it's only normal it should happen to you, too - right? One of the standard phrases in the sales lexicon is "My you were tough, but we got it done! How about some referrals." This by itself is not evil. But if you've taken advantage of someone as if they were a tough loan when in fact they were not and could have gotten a better deal from someone else, you're lining your pocket at your client's expense. Everybody deserves to get paid for a job well done. But when my contacts in the escrow and title business tell me about people who only serve this ethnic market or that ethnic market who have six percent state of California limits on their compensation externally applied to every single loan they do, or how these people consistently have a sales compensation a full percent above the market, that tells me something: that these alleged professionals are taking undue advantage of their target market. Many of these people they are targeting literally have no way of knowing there is something better out there. Are their tactics illegal? No. Unethical? In at least some cases. Taking advantage of client ignorance? Definitely. The process of purchasing, selling, or financing real estate is byzantine, with rules and regulations that get more complex every year. The average citizen has difficulty understanding the things that may be relevant to their particular transaction (I've had to explain to lawyers how they got taken in their previous transaction). To most people, the whole thing is like some immensely complicated magical ritual. Place the proper documents at the foot of the underwriting god, dance three time sunwise and four times widdershins round the appraisal every day for a fortnight, pray with the high priests of insurance, and you get your house. It has elements in common, I will admit. But the processes of real estate sales and real estate loans are coldly, brutally, logical once you understand them. Unfortunately, the odds of understanding are stacked even further against those who are apart from the majority of society. Those who are concerned with minorities having inferior loans would have more success in connecting the people to the mainstream of society than in considering further burdensome anti-discrimination legislation. Caveat Emptor Original here

Debunking "Banks Give Better Deals Than Brokers"

Mon, 09 Nov 2009 07:00:00 -0800

Better deals for the bank, that is. Ken Harney has an article Study Shows Loan Brokers' Better Side

But now a new, independent academic study has concluded the opposite: According to a team of researchers headed by Georgetown University's Gregory Elliehausen, home mortgage applicants with less-than-perfect credit pay lower financing costs when they obtain their mortgages through brokers rather than from loan officers directly employed by lenders. The same pattern holds true for African American, Hispanic and low-income borrowers.

The study was limited to subprime borrowers, but the results are not surprising: Overall, broker loans cost 1.13 points less for first mortgages, 1.98 less for second mortgages For borrowers in predominantly black areas, the difference was 1 point and 1.9 points, respectively. For borrowers in predominantly hispanic areas, the difference was 2 points and 2.4 points. The explanation as to why this gap is larger is probably as simple as the fact that many of these folks limit themselves to dealing with Spanish speakers.

Skolnik added, though, that the data overall could reflect that "brokers in general operate in a much lower-cost structure" compared with banks and retail mortgage companies that carry heavy overhead and employee costs. Moreover, he said, "brokers are far more agile and nimble than retail" lenders, when pushed to compete on pricing and terms.

That and any given lender may have anywhere from a dozen loan programs to fifty, all intended to hit specific niches and priced for given underwriting assumptions. A 3/1 is different from a 7/1 is different from a 30 year fixed, stated income is different from full doc is different from NINA. That's nine programs right there, and this is A paper stuff. Subprime is even more varied. It doesn't matter if you barely meet guidelines or soar through them. If you find a program with tougher underwriting guidelines that you still qualify for, than that lender will give you a better rate on the loan, because they will have fewer of them go sour, and therefore get a better rate on the secondary market. You can go around to all the lenders yourself - or you can go to a broker. Furthermore, even if you're one of those so slick that you fit into the top loan category of the toughest lender, brokers can typically get you a better price. Why? Two reasons. First, the lenders don't have to pay broker's overhead, making it more cost effective for the lender to do the same business through the broker. Second, and more importantly, when you walk into a lender's office, they regard you as a "captive" client. Brokers know better. Brokers are not captive to anyone, and they know that you're not captive to them. A good broker's loan officer will price with at least a dozen lenders. I had shopped fifty or more for tough loans, even before automatic pricing engines. Furthermore, there's an efficiency factor at work. After a while, a good loan officer learns which lenders are likely to have good rates for a given type of client. Which do you, as a client, think is likely to be the best use of your time and resources? Going to all those lenders yourself, or going to a few brokers? This article of mine is also highly relevant to this article's subject matter. Caveat Emptor Original here

Mortgages: General Concerns and Manufactured Housing

Sun, 08 Nov 2009 09:00:00 -0800

A mortgage or Deed of Trust (they're not the same!) is basically pledging an asset that you own as collateral for a debt. If you default on the debt, the lender takes your property. When you're talking about real estate in the state of California (and many others), this is generally accomplished by use of a Deed of Trust. There are three parties to a Deed of Trust: the trustor, trustee, and beneficiary. The Trustor is the entity getting the loan. The Beneficiary is the entity making the loan. The Trustee is the entity which has the legal responsibility of standing in the middle and making sure the rules are followed. When the loan is paid off, they should make certain a Reconveyance is completed and sent to the trustor so they can prove it was paid off. If the beneficiary is not being paid, they are the ones who actually perform the work of the foreclosure. One thing to keep in mind during all discussions of real estate and real estate loans is that the amounts of money involved are usually large - the equivalent of somebody's salary for several years on every transaction. The temptation to fudge the numbers or even outright lie to get a better deal, or to get a deal at all, is strong. Many people don't think they're really doing anything wrong by fudging things a bit, but this is FRAUD. Serious felony level FRAUD. Fraud, and attempted fraud are widespread. There are low-lifes out there who make a very high-class living at it (for a while). Every lender has to devote a large amount of resources to determining that each individual transaction is not being conducted fraudulently. To fail to do so would be to fail in their jobs to protect their stockholders and investors. I have told many stories about the most common sorts. But the reason everything in every real estate transaction is gone over with such a fine-toothed comb that adds thousands of dollars to the cost of the transaction is that people lie, cheat and steal with such large amounts under consideration. Every hoop that anybody is asked to jump through has a reason why it exists, and often that is because somebody, usually many somebodies, have committed FRAUD based upon that particular point. One of the conditions I must attach, implicitly or explicitly, to every quote for services, is that this is based upon the condition that you are telling me the truth, the whole truth, nothing but the truth, and are being honest and forthright in your presentation of the facts without trying to hide anything and are specifically calling my attention to anything that you suspect may be a problem. And because the list of what is relevant information is long, complex, and conditional upon factors that are often opaque to non-professionals, sometimes, people quite honestly don't realize that something is a fly in the ointment so they don't mention it. I, or any other professional practitioner, have no way of knowing that said fly exists unless you, the client, tell me about it. Therefore what I tell you initially does not account for said fly. This is not unethical, it is just a due to the fact that I don't have all of the relevant information.. When you're talking about residential real estate loans there are basically two absolute requirements as to the nature of the collateral. The first is land - land as in real estate. A partial, fractional, or partial ownership of a common interest in land (as in a condominium) are each sufficient unto the task. A rented space to park your mobile home is not. To that real estate, there must be permanently attached in a way so as to prohibit removal, or at least make it an extended project, a residence in which people can live. We're all familiar with you basic site-built house. Personally, I'm a big believer in the virtues of manufactured housing. To paraphrase Robert A. Heinlein in precisely this context, imagine a car for which all the parts are brought individually to your home and assembled on site with ordinary portable tools in an environment which was not specifically designed to facilitate said assembly. How much would you expect to pay, and how would you expect it to perform? The correct answers are "A LOT more than for your house", and "not very well, in terms of either reliability, speed, or economy." Nonetheless, when a lender looks at a house that's been moved to the site, they see one that can be moved away from the site as well, and they are skeptical because so many people have done precisely this. Furthermore, the way that residential real estate is valued is somewhat arcane. The lot itself may be worth $400,000 here in California because it has $150,000 of improvements on it in the form of a three-bedroom house on it, but take away that three-bedroom home, and the lot may be only worth a fraction of the amount. So they loan you money based upon a $550,000 value of the combination as it sits. Some time later, you back your truck up to the house and cart it off, and then default on the loan, leaving the bank a lot may only have a value at sale of $80,000. Now imagine yourself as the bank employee who made the loan. How do you explain this to your boss? Over the years, many bank employees have had to explain this to their bosses, all the way up the chain of command to CEOs explaining to investors and stockholders. Lenders know that most people are honest - but they've got a duty to make sure you are among the honest ones. And if you subsequently lose your job and can't pay your mortgage, might you not be tempted to back the truck up and haul the house off somewhere if you could so the bank can't take it? There are good substantial reasons why many lenders won't approach manufactured housing as residential real estate, and the ones who do treat it as such charge higher than standard rates, and place further limitations on lending. When I originally wrote this, I was personally eying a beautiful manufactured home that more than meets my family's needs, was in the middle of the area I want to live in, and was priced more than $100,000 lower than comparable sized and lower quality site built homes on smaller lots. Yet there was a reason for that lower price. It's not like that owner just decided to list it for $150,000 less than he could get. The home carries many higher costs. If I had bought that home, I would be paying for it in the form of higher loan costs every month, and higher loan fees every time I refinance until I sold it, and fewer people able to buy the home when and if I do sell it as a result of loan constraints, and a I can expect lower eventual sales price as a consequence - which is the situation that owner was in when I was looking at it. I reluctantly decided that those costs outweigh the benefits. My decision was regretful, but until somebody comes up with a procedure that banks agree makes manufactured housing equal in every way to site built in their eyes, it is also firm. Caveat Emptor Original here (And I must say that if somebody comes up with such a procedure, you will be a gazillionaire, and deserve every last penny and then some. I hereby publicly forswear all claims of compensation for the idea of such a procedure. If you can make it work and it makes you rich, I won't ask for a penny, although any contribution you care to make voluntarily will be happily accepted. I just want to be able to say you got the idea from me, as part of my contribution to a better world) real estate mortgage manufactured housing

Debunking the Money Merge Account Scam (Games Lenders Play, Part 8)

Sat, 07 Nov 2009 07:00:00 -0800

Mortgage Accelerators, or Money Merge Accounts, have become the thing that everyone's pushing of late. I have gotten so much junk mail about this from more originators (who don't know who I am) and wholesalers (who should) that I'm going to have another whole go at the entire concept. The claim most often advanced is "pay off your mortgage in a fraction of the time!" In fact, typical numbers say they're only going to do a fraction of the good done by biweekly payment programs, which effectively make one extra payment per year. Money merge accounts or Mortgage Accelerators (to use the term I originally learned years ago) have been pushed and over-promised so badly of late that I hope whoever manages to do an elementary search will be able to find a voice of sanity. These wasteful loans that waste a homeowner's money are fast becoming the current market's negative amortization loan as far as marketing goes. These things are being pushed hard, consumers are being led to expect far greater results from them than they are likely to achieve, with the results being that those consumers who sign up for them are wasting their money. If they're not as bad as negative amortization loans, that's still damning with faint praise if ever there was such a thing. Not as bad as the loan that encouraged people to buy a more expensive property than they could afford, put them more deeply into debt with every passing month, ruined their credit ratings, and caused them to lose the property they over-extended to buy, as well as setting the United States as a whole up for the worst financial crisis we've experienced in the past eighty years. Well, it is kind of a high bar for lenders to get over, and they haven't done it here - but that's not due to concern for consumers. (one way of looking at it with considerable merit was that the Era of Make Believe Loans was scamming investors, while these merely scam consumers) What goes on with these accounts is complex, and they're not all identical. The basic idea is the same, however. You create a special account of some nature, where you deposit your entire paycheck in the mortgage account, where it lessens the amount of interest you pay on a day-to-day basis. Then you pay your other expenses of living out of the account, gradually increasing the amount back up until the next time you get paid. The idea is that by paying down the balance with your entire paycheck, less interest accumulates and people making the same regular payments will pay their balances down faster with the same balance. Sounds like a cute idea, right? If it was free, they would be a pure gain for the consumer. Unfortunately, they're not free, and I've never yet seen one that wasn't more costly than it could possibly be worth. Lenders like these things for a lot of reasons. Most obviously, they're getting pretty much all of a consumer's banking business. Checks come in, go out, clear or don't; all those lovely fees. In the vast majority of all cases, there's the initial cost and interest expense of an associated home equity line of credit. This also raises the bar to make it more difficult for a consumer to refinance away from their loan if someone offers them a better deal. Furthermore, there's usually an explicit charge of about $3500 to set the thing up. I'll show where this money would be better spent on a direct paydown of the mortgage. Also, the people who sell these things have these beautifully intricate presentations. While people are watching the money whizzing about between one account and another, they're usually not considering whether those figures are reasonable, typical, or even anything like the numbers they personally experience. Most importantly if consumers are shopping for a new loan, their attention is distracted from the most important part of shopping for a loan - getting the best possible tradeoff between rate and cost, focusing instead on this fascinatingly complex toy that doesn't make nearly the difference most of the people pushing it say it will. Taking the attention of consumers off the question of what rate they are getting, on what type of loan, at what cost, means that they don't have to compete nearly so hard to give you the most competitive rate-cost tradeoff. In plain English, their loans can charge a higher rate of interest. In fact, this difference will cost the typical borrower far more than they could ever hope to save via a money merge account. I'll go over that in this article, as well. So, first off, let's consider what typical numbers are. Here in San Diegowhen I originally wrote this, the median property sale was $558,000. In order to qualify for the loan, consumers need a back end Debt to Income ratio of 45%. Front end will most typically be around 36%, with property tax, insurance, vehicle payments, credit cards, student loans etcetera. I'll be really nice and say 32% - chances are that if it's lower than that, the people would have bought a more expensive property. I'm going to assume 20% down payment or equity, which is, if anything, larger than typical. We'll postulate a rate of 6%, which is probably a hair higher than most folks with conforming loans have - and more favorable to the money merge account - and I'm going to put it all into one loan even though that's theoretically a jumbo loan amount, just to give the money merge/mortgage accelerator every possible benefit of the doubt. After all the smart thing to do is split the loan amount, which leaves roughly $30,000 out of this account in a higher interest rate loan, and so the scenario envisioned is more beneficial to the Money Merge than what happens in the real world. This gives a loan of $446,400. At 6 percent, the payment would be $2676.40. Assuming 32% front end ratio, that's a gross monthly pay of $8365. I don't have withholding tables, so I'll use the actual tax rate for couples making slightly more than $100,000 per year with about $55,000 taxable, which is $7400, plus about $8700 in Social security taxes, plus state taxes which I will assume to be roughly $2000. This money gets withheld - it never comes to you in the form of a check. Since you don't get it, when your check goes into the money merge, it doesn't help you pay the interest. This leaves $81,900, or $6825 in take home pay. I'm not going to worry about other deductions like health care, or how your pay is structured, which further erode the benefit. I'm just going to assume it hits your account in full on the first day of the month, maximizing benefit, although I'm still going to assume all of the excess goes out every month. If nothing else, for investment accounts. It's pretty silly to have your money paying off a 6% tax deductible debt when you can have it earning about 10% elsewhere! But this isolates the benefit gained from the actual Money Merge, and separates it from any benefit derived from making extra payments, which is another way the people selling these play "hide the salami" with consumers, distracting them from what's really causing the benefit - the extra payment, which almost anyone can do, anytime they choose, for free. I'm even going to assume that you don't have an impound account, so the money you eventually spend for property taxes and homeowner's insurance goes to help the money merge as well. So you get $6825, less the payment of $2676.40, leaves $4148.60. Over the course of the month, money goes out to pay for all of your expenses. They people who sell money merge accounts urge you to leave paying your monthly bills as late as possible to get the maximum benefit from these accounts, completely ignoring the costs of the occasional late payment this is going to cause, as well as detrimental effects upon your credit when it does happen. In fact, a certain amount of these bills are going to wrap into the next month, meaning that under the conditions we've agreed upon, you write that check to your investment account for this month and pay that bill out of your next month's pay if you're smart. Since you're going to write that particular check ASAP if you're smart, that's going to diminish the effects of the $4148.60. But I'm going to be nice and give you a $1000 "cushion" that you carry into the account from month to month (again, you won't do this if you're smart), while the $4148.60 is going to be paid out evenly over the course of the month, giving you a mean daily amount of $2074.30, plus $1000, or $3074.30 per month of temporary principal reduction. This reduces your interest paid by $10.37 that first month! I'm going to assume this is pure gain, every month, and that it continues to compound. If you do this every month for thirty years, you'll actually pay off that loan a grand total of three months early, and the last payment is reduced to a shade over $400! All of this hooting and hollering and shouting and frustration over three months of paying your mortgage off - in an absolutely optimized, perfectly favorable environment where the Money Merge account didn't cost you a penny in set up fees or monthly cost. And even in this ideal situation, with the maximum reasonable advantage compounding over the course of the entire mortgage, out of $963,000 in payments, the money merge saves you about $10,000 at the very end - just over 1% of total payments, heavily discounted for time value of money thirty years from now. That's not the "pay your mortgage off in twelve years for the same payment!" come on used by the most popular of these! Were I the regulatory authorities, I'd be looking very hard at their advertising! But most people don't pay their mortgage off in this fashion, and these accounts are not free - or at least I've never heard of one that was. Most people refinance or sell within three years. When they do that, the accounts have to be set up again - which requires new set-up fees. In the example given above, that $10.37 per month compounding for three years is worth $407.92 - and that's if there are no countervailing expenses. In point of fact, most of these accounts charge a monthly fee that ranges from roughly $1 to whatever they think they can get away with. Plus, there's an upfront cost that ranges from $1995, the cheapest I've seen, up to nearly $6000 depending upon the plan, with most seeming to fall in about the $3500 range. Plus, most of them require you to use a special Home Equity Line Of Credit (HELOC), which costs money in and of itself. The rates on HELOCs are higher than for regular mortgages, forcing you to effectively pay a penalty in interest of having $2000 or $5000 or whatever it is at a higher rate of interest, by usually about 2%. Keep in mind that this is ongoing, and for the entire month. The $2.30 to $8.30 per month this costs directly soaks off a large percentage of the $10.37 putative gain you get. Not to mention whatever the initial costs of the HELOC are. Some are cheap - I've seen others that had thousands of dollars in upfront costs. The HELOC costs, both upfront and monthly, are not relevant to the few plans that don't require HELOCs, but most do. So with a middle of the line account, you've spend $3500 just to set the money merge (or mortgage accelerator) up, versus $407.92 in benefits over three years, which is longer than most people keep a given loan. Would I do that? Not on your life or mine! Why should I expect one of my clients to do so? Now, let's consider some alternatives. Remember I told you the money merge account saves you $10.37 per month in optimal conditions, which works out to just about $10,000 saved at the end of thirty years? Well, let's ask ourselves, "What would be my benefit if I just took the $2000 the cheapest one of these costs me and instead used it for direct principal reduction?" In other words, what if you added that $2000 to your regular mortgage payment once? The answer is, for the example above, that you pay off your mortgage four and a half months early, as opposed to about 3.8, saving an additional $1800! Using the upfront costs for the cheapest of these that I'm aware of pays the mortgage off sooner than the accelerator account! After the three years that's all most people keep their mortgage, the person who just uses a $2000 sign up fee is still $1985 and change ahead of the poor stupid schmoe who signed up for the accelerator account! For a middle of the line $3500 set up fee, the difference, mutatis mutandis, is $3780 and growing at the end of three years, to the point where that mortgage is paid off 6.7 months early, as opposed to the mortgage accelerator's 3.8, saving thousands of dollars more than the "accelerator"! This doesn't count the monthly fees most mortgage accelerators charge, HELOC set up fees, or additional HELOC interest charges that the vast majority of these accounts require, and which do siphon off the benefits as noted above. Keep in mind that with all of this, I've been building a "best reasonable case" to maximize the money merge's advantages. I've mentioned several assumptions that I was making in the account's favor. If any of them changes, the putative benefits basically vanish entirely, or even go decidedly negative. Now, let's ask ourselves if getting distracted by a mortgage accelerator caused us to not shop as aggressively, or not pay as much attention to the tradeoff between rate and cost as I should have, and as a result, I end up with a mortgage rate that is a mere 1/8th of a percent higher for the same cost. An eighth of one percent is the smallest rate bump in the "A paper" world, and quite often I see differences of a quarter to half a percent for the same loan between various A paper lenders when I'm shopping a loan. What would that cost me if I could have had 5.875% for the same cost instead, even keeping the benefits of the accelerator? The answer is $35.77 per month on the payment, but more importantly, $46.50 the first month on the interest, and this adds up to $1641.77 less interest paid over the three years most people keep the mortgage, while the $10.37 per month benefit of the money merge put the 6% loan as having a balance that's actually $20 lower. Not counting fees of the money merge account, or anything else - just pure difference on the actual cost of that loan, in the form of interest you paid that you wouldn't have had to. How does that sound: Even if everything about the money merge was free, you'd be getting a $20 lower balance over three years in exchange for having spent $1600 more on interest. If you offered people $1600 for $20, what proportion do you think would take you up on it? If you offered them $20 for $1600, how many suckers do you think would go for it, even if you personally begged ten million people? For those of you who may be loan officers - or real estate agents - reading this, can you point to one single putative benefit that you would think worth the cost that lenders charge to sign up for these programs yourself? As I've said, I can't. There is nothing here that justifies the wild ways in which these are being marketed, and the ridiculous promises that are being made about them. In point of fact, I can think of only a few possible reasons to sell these:

Eyes only for a commission check (probably number one in terms of the overall market)
You don't understand what's going on, took some marketers word, and haven't done the numbers yourself (hardly a recommendation of your services or professionalism)
You just don't care about your clients welfare

When these started being marketed, I wrote about the broad outlines. Never had the urge to hose a client by selling one, so didn't really investigate any further, although I wrote another article about the benefits being quite minimal as compared to the costs. But the ridiculous promises and over-aggressive marketing these have been subjected to in recent weeks have finally motivated me to do a rigorous analysis, and what I see is not "merely" of minimal benefit in even the scenarios most amenable to said benefit, but actually costs more than any putative benefit. I can see precisely zero justification for counseling any client in any situation to pay the money that every one of these I have yet encountered to set it up, as the benefits derived from any of these programs with which I'm familiar never do manage to equal the opportunity costs. Now before I sign off, the point needs to be made that the psychology the account engenders in the consumer is likely to be beneficial, rewarding themselves psychologically for making what are extra payments on the mortgage, and as far as that goes, the account does accomplish something praiseworthy. But the vast majority of all mortgage borrowers can make extra payments of principal any time they want, for free, and when you consider these accounts strictly on the basis of actual numerical advantage over real alternatives, the costs of the program are literally never recovered. Caveat Emptor Original article here